Please ensure Javascript is enabled for purposes of website accessibility

These 3 Companies Could Slash Their Dividends in 2016

By Travis Hoium - Jan 7, 2016 at 3:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Energy stocks, in particular, may have a hard time keeping dividend payments high in 2016.

Dividends are a great way for investors to generate cash flow, and even beat the market long term. But dividends aren't a guaranteed payment from a company, and still require cash flow from operations to be maintained. For that reason, they can be higher risk than a lot of investors think. 

Below are three companies that I think will have a hard time maintaining their dividends in 2016.

Noble plc
One of the last remaining offshore drilling companies paying a dividend is Noble (NEBLQ), and I think that ends in 2016. The company reduced its payout after the third quarter from $0.375 per share to $0.15 per share, but even that may be too much in today's environment. 

Earnings from continuing operations, excluding one-time gains, were $0.72 per share in the third quarter, and that figure will likely decline in 2016. Backlog dropped from $8.7 billion after the second quarter to $8.1 billion after the third quarter as new contracts dried up. Also, $35 per barrel oil will cause an offshore drilling slump to be extended into 2016.

It isn't that Noble couldn't pay a dividend in 2016; it's that the money could be better used elsewhere. Long-term debt stood at $4.5 billion at the end of the third quarter, and less leverage on the balance sheet would be welcome with new drilling contracts hard to find. Most major competitors have already slashed their dividends to $0; it wouldn't be a shock to investors to get a lower dividend.

TerraForm Power
When dividend yields rise to double digits, it can be a sign that investors don't really expect the payout to last long. That's the case with TerraForm Power (TERP) heading into 2016. As I'm writing, the stock yields a whopping 11.1%, which is so high it will create problems for the company long term. 

Yieldcos like TerraForm Power rely on low dividend yields to fund acquisitions of new projects that will maintain and grow the dividend. The plan is to sell new shares and debt to buy new projects that generate a higher return than the cost of new capital. That can't happen with a dividend yield in double digits. 

In 2016, I think TerraForm Power would be better off reducing its dividend to either fund asset acquisitions, or reduce a debt load that stood at $2.5 billion at the end of the third quarter. A lower payout would be a prudent move to reduce risk this year. 

It may seem outlandish on the surface, but I think 2016 will prove to be a tough year for big oil stocks. They've held up fairly well under lower oil prices because they have diverse businesses, but $35 per-barrel oil, and gasoline under $2 per gallon doesn't leave a lot left for profit. One that could be in big trouble is Chevron (CVX 0.83%), which is already paying more in dividends than it can afford. 

The problem is easy to see in the chart below. Earnings are plunging, and are now almost below what's paid out to each share in the form of a dividend.

CVX Normalized Diluted EPS (TTM) Chart

CVX Normalized Diluted EPS (TTM) data by YCharts.

In 2016, analysts are expecting that earnings will fall to $3.42 per share -- meaning the coverage ratio of earnings to the dividend would be just 80%.

Worse yet, even after slashing its capital spending plan to $25 billion - $28 billion, down from $35 billion last year. The company is still expecting to spend more on drilling for oil and paying dividends than it generates in cash from operations. That means the only way to pay the dividend is to add debt, which isn't a good sign after debt increased from $27.8 billion to $35.9 billion during the past nine months. 

Chevron's best move in 2016 will be slashing its dividend to keep cash inflows more in line with outflows. Whether or not it does so may be another story.

Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chevron Corporation Stock Quote
Chevron Corporation
$156.28 (0.83%) $1.28
Noble Corporation plc Stock Quote
Noble Corporation plc
TerraForm Power Stock Quote
TerraForm Power

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.